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What Does It Take to Close Acquisitions Amid a Crisis? Plenty of Dry Powder and a Patient Mindset

How one investment management firm has been able to stay active in a market turned upside down.

In the first quarter of this year, a little over three-fourths of U.S. investment sales volume in commercial real estate came from transactions closed in January and February, according to a report from commercial real estate services company CBRE. Deal volume essentially fell off a cliff in March due to the coronavirus pandemic.

Chicago-based Harrison Street Real Estate Capital LLC, however, has been able to stay atop that cliff, and shows no signs of taking a tumble. The investment management firm completed about $1.5 billion in deals during the first four months of this year. And for all of 2020, it’s on track to meet or exceed the $7 billion in deals it carried out last year.

So, how has Harrison Street managed to maintain a steady deal flow during a time of economic upheaval—a time when many buyers and sellers are backing out of deals? Through a potent combination of partnerships, prowess, patience and powder (the dry kind).

At this point, Harrison Street—an investment management firm that focuses on alternative assets—is sitting on a little over $2 billion in dry powder and continues to remain “very active” on the investment front, Christopher Merrill, the firm’s co-founder, chairman and CEO, tells NREI.

Harrison Street’s specialties include seniors housing, student housing, medical office, life sciences and self-storage. As of March 31, the firm had $26.4 billion in assets under management.

“We’re seeing a lot of opportunities in our core sectors, given our significant dry powder and deep understanding in the areas where we invest. Other firms that may also invest in retail or office have had to push the pause button,” Merrill says.

Here are a couple of recent examples of how those opportunities have borne fruit for Harrison Street:

  • On April 2, the firm announced the purchase of 234,000 sq. ft. of life sciences space in San Diego. The two buildings involved were recently converted from traditional office space into class-A life science space. The tenants specialize in pharmaceutical manufacturing, with a focus on vaccines and cancer therapies, among other things.
  • In late March, the firm acquired 208,000 sf. ft. of medical office space in suburban Houston. The property has a long-term lease with University of Texas MD Anderson Cancer Center.

“The pipeline of investment options for us has really increased,” Merrill says.

While Harrison Street is moving forward with deals during the coronavirus pandemic, other buyers and sellers are holding off.

In the first two months of 2020,  commercial real estate sales volume was robust, says Chris Ludeman, global president of capital markets at CBRE. But the investment landscape became much rockier in March, when the coronavirus pandemic set off stock sell-offs and triggered widespread closures of businesses and schools.

“As the coronavirus and resulting economic stress became evident, investment activity predictably dropped, and price discovery will continue to be a challenge until the durability of rent collections becomes clear and liquidity returns,” Ludeman says.

Once rent collections and the debt markets stabilize, Ludeman expects an uptick in deal flow as the year marches on.

Andrew Rybczynski, managing consultant at real estate manager and adviser CoStar Portfolio Strategy, says that as of May 6, CoStar had identified $23 billion in sales volume for March, compared with $27 billion last year. For April, CoStar so far has tallied $6 billion in deals versus $22 billion in 2019.

“March seems to have been a little bit of a letdown, but April has had a huge transaction drop, and we expect the same for May,” Rybczynski says.

Harrison Street, however, isn’t letting up on investments.

In large part, Merrill attributes his firm’s forge-ahead attitude to deep experience in its property sectors and long-term relationships with its partners, including 40 health care systems and 150 colleges and universities in the U.S., United Kingdom and continental Europe.

“These are not areas that we dabble in. These are really areas that we focus on,” Merrill says. “Right now, operators, universities and health systems want to work with a firm like Harrison Street that has consistent capital and really understands the asset classes so that there’s going to be some surety.”

In addition, the firm has the means to handle the recent volatility in the debt markets. It has leaned on its longtime lending relationships and solid balance sheet to execute deals, Merrill notes. But if Harrison Street isn’t able to agree to terms with a lender, it’s closing transactions on an all-cash basis, he says.

Harrison Street’s investment model has been designed to withstand “black swan” events, Merrill adds, shunning deals tied to economic cycles and concentrating on need-based properties.

“Investment managers that set up their business model not anticipating that there are going to be black swans are not really developing strong firms,” Merrill says. “This is not going to be the last time something like this happens, and that’s why we continue to stay true to the way we invest.”

Amid the global financial crisis of 2007-09, Harrison Street pursued this investment strategy. In fact, Merrill says the “business was almost accelerated coming out of the global financial crisis.” Today, the firm is seeing another acceleration, partly because some real estate investors have struggled with access to capital or with short-term debt problems, he notes.

“What we’d like to do is continue to focus on good quality investments and good, solid demographics,” Merrill says. “We think long-term and are patient investors. We’re not trying to time the markets.”

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